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The Business Costs of Corruption

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796971032_ef40405ac6_bIn its 2013 report, the Africa Progress Panel led by Kofi Annan estimated that Africa loses twice as much in illicit financial flows as it receives in international aid. This is one of many snippets of fact about the huge costs of corruption on Africa and on Nigeria in particular. It is important that businesses be aware of the business costs of corruption and to take appropriate steps to curtail it. While corruption has both demand and supply side elements, businesses certainly have the power to reduce corrupt practices within their ambit such as illicit financial flows, transfer pricing, tax evasion, and bribery to obtain government procurement contracts, etc. It is hoped that a full estimation of both the direct and indirect costs, and the short-term and long-term costs of corruption will make avoiding corruption a business imperative.

A non-exhaustive discussion of the business cost of corruption is offered below:

First, corruption is essentially a tax on business. It increases the cost of doing business directly through hefty bribe payments. Another direct cost of corruption is the increase in the risk-adjusted returns demanded by providers of capital to businesses operating in corrupt environments.
An indirect cost of corruption is the slowing of bureaucratic processes, which adds to the turnaround time to complete business registration, licensing and projects.

Second, corruption especially in the public sector leads to inefficient use of public resources and prevents investments in public goods, which could have increased the economy’s competitiveness. For example, Nigeria has bungled many refinery turnaround and maintenance projects that could have significantly reduced the cost of doing business were they successful.

Third, participating in corrupt practices has far reaching costs for companies including fees in cases of criminal and civil prosecution, fines, remediation costs and liabilities arising from an override of safety or quality regulations. Corruption also limits the extent to which a company can participate in the global value chain, as some multinationals due to strict home-country laws are more discerning of the ethical standards of the business partners they choose. Corruption also reduces a business’ reputation capital.
Fourth, as a result of lost and inefficient investment of resource and detraction of foreign investors, corruption reduces the overall level of economic growth. In the long run, this reduces the aggregate demand and purchasing power of households that businesses produce their goods and services for. In order words, corruption reduces the growth in a company’s customer base.
Finally, corruption distorts the market mechanism and harms the success of small and medium enterprises, as they often do not have the resources to compete on an already skewed playing ground.

Given the high costs of corruption, reducing corruption should not only be a focus of civil society organizations but should also be a focus of trade coalitions and business community efforts. Companies should join the anti-corruption initiatives such as the UN Global Compact and the Partnership Against Corruption Initiative, and must create clear –cut policies, procedures and practices to comply with ethical standards of doing business.a

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